Expert Financial Analysis and Reporting

Bristol-Myers Squibb Company announced today that Opdivo had failed to reach its primary endpoint of progression free survival in the CheckMate -026 trial in first line non-small cell lung cancer. This was an open-label, study that randomized 541 patients to receive either Opdivo as monotherapy or investigator’s choice of chemotherapy. Patients enrolled in the trial had received no prior systemic treatment for advanced disease and tested positive for PD-L1 expression with expression ≥ 5% PD-L1 tumor expression.

The stock market reaction was brutal as the stock dropped 17% at the opening. There were great expectations for clinical success and with that a large commercial opportunity in this first line stage of non-small cell lung cancer. Opdivo has already been approved for and dominates second line use in non-small cell lung cancer. Contributing to this drop was the issue that Merck’s Keytruda was successful in the Keynote-024 in this setting. Keynote-024 like Checkmate-026 compared Keytruda to investigator’s choice of chemotherapy.

Is Merck the Clear Winner?

The key and probably critical difference between Checkmate-026 and Keynote-024 is that patients enrolled in Checkmate-026 had to have ≥ 5% PD-L1 tumor expression while Keynote-024 required ≥ 50% PD-L1 tumor expression. So what does that mean? Recall that some tumors block the immune response by releasing the protein PD-L1. It binds to the PD-1 receptor on T-cells and when doing so turns down the immune response to cancer. The action of both Opdivo and Keytruda is to bind to the PD-1 receptor and block PD-L1 binding.

Here is my key take. Tumors with high PD-L1 expression as in the Keytruda trial are likely to respond better than patients with low expression as in the Checkmate-026 trial. BMY was very aggressive in going after the low expressing PD-L1 tumors that are less likely to respond. I think that if BMY had set the PD-L1 expression level at ≥ 50% PD-L1 tumor expression as did Merck, that the trial would have been successful. The full results of Checkmate-026 will no doubt be stratified to see the effect on progression free survival by PD-L1 levels and could confirm my hypothesis. If so, key opinion leaders are likely to conclude that the difference in results in Checkmate-026 and Keynote-026 are due to trial design rather than drug effect.

Bristol-Myers May Still Emerge with a Win

MRK's Keytruda likely will be approved for first line NSCLC in patients that express PD-L1 at 50%+and will enjoy a competitive advantage over Opdivo. However, it is estimated that about 60% of patients have ≥5% PD-L1 expression cut off, 45% have ≥10 % and only 20% have ≥50%. If my hypothesis is correct and remember it is a hypothesis, I think that physicians may be reluctant to treat patients with PD-L1 expression that is less than 50%. If so, Merck will have clear advantage in this segment of the first line market which accounts for only 20% of patients. Moreover, this advantage may only hold through 2017.

BMY has another ongoing study in first line non-small cells lung cancer called CheckMate -227. This looks at the combination of Opdivo and Yervoy in the PD-L1 expressing patient population. Data from the earlier Checkmate -12 trial suggested and there is strong KOL sentiment that this combination will be much more effective than Opdivo alone. It is also important that Checkmate-227 will compare Opdivo plus Yervoy alone or in combination with chemotherapy in non PD-L1 expressers.

If this trial is positive in both regards, BMY will enjoy a significant competitive advantage in the first line non- small cell lung cancer market over Merck. CM-227 has a primary completion date in January 2018, but data from CM-227 in PD-L1 positve patients could be forthcoming in 2H, 2017 and/ or at an earlier interim look.

Investment Thesis

The massive sell-off seems much overdone. I think that the market has assumed that the failure of Checkmatre-026 means that Bristol-Myers will be shut out of and that Merck will dominate the first line non-small cell lung cancer segment. Based on my previous analysis, this is not necessarily nor likely the case. I see this as a likely buying opportunity for Bristol-Myers Squibb.

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